RCAPS Working Paper Series
Total Page：16
File Type：pdf, Size：1020Kb
RCAPS Working Paper Series RWP-13005 Dawn of Industrialisation? the Indonesian Automotive Industry January 16, 2014 Kaoru NATSUDA and Kozo OTSUKA College of International Management Ritsumeikan Asia Pacific University, Japan John THOBURN* School of International Development University of East Anglia, UK and Graduate School of Asia Pacific Studies Ritsumeikan Asia Pacific University, Japan Ritsumeikan Center for Asia Pacific Studies (RCAPS) Ritsumeikan Asia Pacific University (APU) URL: http://www.apu.ac.jp/rcaps/ Dawn of Industrialisation? the Indonesian Automotive Industry Kaoru NATSUDA and Kozo OTSUKA College of International Management Ritsumeikan Asia Pacific University, Japan John THOBURN* School of International Development University of East Anglia, UK and Graduate School of Asia Pacific Studies Ritsumeikan Asia Pacific University, Japan Dawn of Industrialisation? the Indonesian Automotive Industry ABSTRACT This paper traces the development of industrial policy towards the Indonesian motor industry within the automotive global value chain. Showing the current dominance of Japanese motor assemblers, it notes the rather undeveloped nature of the locally-owned supporting industry, particularly compared to neighbouring Thailand and Malaysia. Most investment in auto-parts production has been by foreigners. Nevertheless, Indonesia’s rapid domestic market growth has allowed it to attract foreign automotive investment without having to offer excessively generous incentives. While the entry of international mega-suppliers of automotive parts into Indonesia offers opportunities for local suppliers to upgrade their productive capabilities, it also limits their chances to become first-tier suppliers themselves. Key Words Indonesia, Automotive, Motor Industry, Global Value Chains, Industrialisation JEL Classification: F5, F13, L62, O25 1 1. Introduction Having started vehicle assembly as long ago as the 1920s, in 2012 Indonesia’s vehicle production reached over 1 million units for the first time, becoming the 17th largest vehicle producer in the world. Over this period the global environment of the automotive industry has changed greatly: there has been a massive process of consolidation towards a small number of major multinationals, such as Toyota or General Motors (GM), driven in large measure by the need to make very heavy investments in R&D in order to stay competitive and produce new models. Whilst the minimum efficient size (MES) of an individual automotive assembly plant may have fallen to as low as 150,000 units per year,1 the minimum size of firm has greatly increased. It has been argued that as many as five million vehicles a year may be necessary for a mass market auto assembler to stay globally competitive; even luxury car makers Mercedes and BMW make well over a million vehicles annually (Nolan 2012, 25). Increasingly, national markets, particularly in developing countries, are dominated by foreign-owned assemblers. Also, both the growth in demand for vehicles and the location of production of them has been shifting from away from Europe and North America towards Latin America and particularly Asia. Important too are global moves towards trade liberalisation, both internationally and regionally, which work against the protection of national motor industries from imports, and encourage and facilitate assemblers and their global mega-suppliers (about which more later) to integrate their production across borders. In addition, starting mainly in 1 See Auty (1994, 610-614) for discussion of the minimum efficient size of automotive plant. Note that the MES for some key components such as engines, transmissions and axles are several times larger than for assembly. 2 the 2000s, the kinds of policies that are internationally acceptable have changed. Restrictions imposed by the World Trade Organization (WTO) on trade-related industrial policies have restricted the ‘policy space’ available to promote the development of automotive industrialisation, especially of the import-substituting kind that characterized most developing countries’ initial attempts to establish the industry (Gallagher 2005; Wade 2003; Natsuda and Thoburn 2014 forthcoming). In this context, Indonesia has some interesting features in contrast to its ASEAN (Association of South East Asian Nations) neighbours. Like Malaysia, it tried to develop a national car but without Malaysia’s ‘success’ in keeping the main national car in production at least. While Malaysia sailed close to the wind of flouting WTO rules, and got away with it, Indonesia’s attempt to establish a national car were so blatantly anti-competitive that it suffered effective protests under WTO disputes procedures from the home countries of rival vehicle producers (Hale 2001, 634). Similarly, Thailand has continued effectively to promote increased local content, though local content requirements (LCRs) are banned under the WTO’s Trade-Related-Investment-Measures (TRIMs) rules. It has done so by using fiscal measures that were sufficiently WTO-compliant to avoid protests.2 In contrast, Indonesia’s LCRs were strongly attacked under the conditionality imposed on loans from the International Monetary Fund (IMF) after the 1997 Asian Crisis (Hale 2001: 634). How then has Indonesia been able to promote its motor industry since the 2000s? What policy space has it been able to carve out to do so? How is Indonesia now regarded in 2 See Natsuda and Thobuen (2013) on Thailand, Natsuda et al. (2013), Segawa et al. (2013) and Otsuka and Natsuda (2014 forthcoming) on Malaysia, and Natsuda and Thoburn (2014 forthcoming) for a comparison of the two countries. 3 relation to neighbouring countries by the multinational assemblers who now dominate vehicle production in the country? We try to answer these questions here on the basis of Information from a set of qualitative interviews with automotive firms, trade associations, ministries and key informants in Indonesia in early 2013, and a range of secondary sources and survey data in English and Japanese. Our next section sets out an account of global value chain (GVC) analysis to provide a setting within which to look at the motor industry. Section 3 provides an overview of the Indonesian automotive industry. Section 4 investigates the development of the Indonesian automotive industry in the period of 1927-2013, with stress on the past 20 years, to provide a background for current policies and future prospects. Section 5 examines future prospects and challenges for the industry within the automotive GVC. Section 6 concludes. 2. The Automotive Global Value Chain The concept of a global value chain (GVC), though now well-known and widely employed,3 is still very useful as a setting within which to understand Indonesia’s automotive industrialisation, although we do not try to force all our discussion into a GVC framework. GVC analysis in principle traces economic activities from raw material production to the final retail sales through various stages of production.4 Such activities include design, production, marketing, distribution, and logistics in bringing out the product or service from the producer to the final consumer. The theory focuses on four main dimensions of any GVC, which may cut across industries: (i) a set of input–output relations between the different stages of production, (ii) territoriality (the geographical dispersion of the chain), (iii) governance (power or exercise of control in 3 For brief surveys of the GVC literature see Natsuda and Thoburn (2013) and Natsuda et al. (2013). UNCTAD (2013, especially ch.4) is useful on the latest thinking in GVC analysis. 4 In this paper, however, we shall not go back as far as the raw materials stage. 4 the chain) (Gereffi 1994, 96-97), and (iv) institutions (in relation to business relationships and industrial location) (Sturgeon et al. 2008, 298-299). A further and particular focus of much GVC analysis is whether domestic firms within a chain can upgrade their products, processes and functions, to achieve higher productivity and (sometimes)5 a larger share of value-added (Humphrey and Schmitz 2002; Kaplinsky and Morris 2001). The formation of GVCs has been facilitated by the growing ability of producers to fine-slice (vertically disintegrate) production into different stages, which can be carried out in different locations. A result of this, and the subject of new work on GVCs, is that where a country exports a good within a GVC, the good’s production may be highly import-intensive and so the gross export value overstates the country’s value-added contribution. Of some 42 industries identified as heavily involved in GVC activity, the automotive industry was second only to electronics in the high share of non-domestic value-added 6 in total exports – around 35%, compared to electronics’ 45% (UNCTAD 2013, 129). This high trade-intensity of production implies there is a lot of choice as to what is produced locally, and also indicates considerable scope for global and regional specialisation in the production of the thousands of components needed for a vehicle. The automotive industry is normally seen as a producer-driven GVC, where major international vehicle assemblers exercise control (governance) over other stages of production, including the location of the industry, procurement, and retail distribution. 5 See UNCTAD (2013, 172) for a discussion of some trade-offs between increasing value-added, on the one hand, and upgrading on the other. 6 Non-domestic here refers to value-added originating overseas.